Why today’s interest rate hike should be the first, and last, for the foreseeable future.

In response to the Bank of England’s decision to increase interest rates to 0.5%, Matthew Brittain, Investment Analyst at Sanlam said:

“The UK has not seen an increase in its base rate for over 10 years, so while today’s announcement doesn’t come as a surprise, it marks a significant moment. The graph below reminds us how quickly the rate of interest fell in the wake of the 2008 financial crisis, and for how long it has remained close to zero.

Source: Bloomberg

“The Monetary Policy Committee (MPC) has a clear mandate to keep inflation at 2%. This maintains price stability, and gives people confidence that the currency will maintain most of its purchasing power. With the Consumer Prices Index (CPI) rising to 3% in September, its highest level since April 2012, the MPC has taken preventative action to head off the possibility of further inflation increases, and the need for aggressive rate hikes in the future.

“We don’t think this is the start of a series of rate increases. Indeed, we believe inflation will return to target levels of its own volition, as the effects of a weak Sterling dissipate. The UK remains in a precarious economic position with high levels of consumer debt and the Brexit negotiations delaying investment decisions, so we think that low interest rates are helpful in keeping the economy strong. Assuming the inflation outlook stabilises, we think this is the first, and last, interest rate hike we will see for a while.”

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